Small fund standouts: The overlooked winners

“The main advantage of a smaller fund size from a fund manager’s perspective is that it enables them to invest in relatively small companies yet still have reasonable liquidity,” explains Matthew Bird, independent financial planner at Seer Green Financial Planning.

“Managers of bigger funds, for example Terry Smith, cannot practically invest in smaller companies due to the sheer size of their funds. If he tried to put 5 per cent of his [Fundsmith] fund (£500m) into a company valued at £500m he would find it practically impossible. 

“Before deploying even 1 per cent of his fund, he would run into significant liquidity issues and probably drive the share prices higher through his own actions.”

Personal motivations also play a role, according to wealth manager Dan Farrow. “The small fund managers have more drive and hunger to perform, as smaller funds are unsustainable and we are talking about an industry where individuals want to earn a lot of money for themselves.”

Trusts

Notably, no investment trusts make the grade in any of the asset classes assessed. But trusts, too, have their unique advantages for some fund buyers.

“The advantage of a small fund is that you are generally catching it before it falls on many people’s radars,” explains Philippa Gee, a wealth manager. “This can help significantly on the sale value if it is an investment trust. An Oeic would not benefit from the rise in sale price due to rise in demand, but would still provide good diversification.”

You have to ask yourself whether the fund has been around for a while and is simply not good enough, or if it is a new fund and what would make it stand out.Philippa Gee

Philip Milton, an adviser, has focused specifically on trusts to take advantage of this phenomenon, selecting products that “the bigger boys cannot deal in”, but which are likely to attract the interest of investors at a later stage – and see shares trade at a premium as a result. 

He has enjoyed success with trusts such as Seneca Global Growth and Income, Miton Global Opportunities and New City High Yield, but concedes that it can be hard to deal in such shares.

Pay to play

As this suggests, smaller funds do come with specific challenges. Investors should be aware that portfolios under £100m in size may levy higher charges than their larger peers, because they are yet to achieve economies of scale.

Some selectors may prefer to wait to see if a fund can achieve greater scale, cut costs, and pass these savings to investors.